Inspiration from physics for thinking about economics, finance and social systems

Friday, December 14, 2012

For banks, nothing is illegal

This would be literally unbelievable, except that we've all become desensitized to the double standard of our justice system -- enforcement of laws against ordinary people, and systematic collusion with large banks and corporate offenders to keep anyone from going to jail. I think Matt Taibbi offers the most honest take on this shameful decision to slap HSBC with fines only, rather than pursuing what should have been slam-dunk prosecutions for money laundering and drug smuggling on a global scale:

Wow. So the executives who spent a decade laundering billions of dollars will have to partially defer
their bonuses during the five-year deferred prosecution agreement? Are
you fucking kidding me? That's the punishment? The government's
negotiators couldn't hold firm on forcing HSBC officials to completely wait
to receive their ill-gotten bonuses? They had to settle on making them
"partially" wait? Every honest prosecutor in America has to be puking
his guts out at such bargaining tactics. What was the Justice
Department's opening offer – asking executives to restrict their
Caribbean vacation time to nine weeks a year?

So you might ask, what's the appropriate financial penalty for a bank
in HSBC's position? Exactly how much money should one extract from a
firm that has been shamelessly profiting from business with criminals
for years and years? Remember, we're talking about a company that has
admitted to a smorgasbord of serious banking crimes. If you're the
prosecutor, you've got this bank by the balls. So how much money should
you take?

How about all of it?How about every last dollar
the bank has made since it started its illegal activity? How about you
dive into every bank account of every single executive involved in this
mess and take every last bonus dollar they've ever earned? Then take
their houses, their cars, the paintings they bought at Sotheby's
auctions, the clothes in their closets, the loose change in the jars on
their kitchen counters, every last freaking thing. Take it all and don't
think twice. And then throw them in jail.

Sound harsh? It does, doesn't it? The only problem is, that's exactly
what the government does just about every day to ordinary people
involved in ordinary drug cases.

And people wonder why the US falls year after year a little further down the Corruption Perceptions Index? As of 2012, we're just slightly ahead of Chile, Uruguay and The Bahamas.

Though the crimes that HSBC committed were quite egregious, Taibbi is not right to equate HSBC with a drug syndicate. The bank for the most part has businesses that make money within the bounds of legality and those gains should not be subject to seizure by the government. In a drug syndicate all of the profits are generated from illicit activity and in those cases it is likely more appropriate to seize those assets.

The $1.9 billion fine that was levied against HSBC likely was 2-3 times the profit obtained from the illicit transactions as is standard for such fines for financial institutions. So in essence the government did indeed capture all of the gains that were a result of the illegal behavior.

Finally with respect to the employees, Taibbi is speaking of compliance officers who are only involved with establishing protocols and processes to avoid such situations and were not directly involved in the laundering activities. Most likely it was clever individuals that created ways to circumvent the policies and protocols who were the ones directly in charge. Therefore for at least the compliance officers, the punishment was probably appropriate in kind but if you want to speak of magnitudes I guess that's very subjective.

The issue is not pertaining to legalities. It's about ethics here. The bank operated within the parameters of lending. However, it was the recent change in regulations that caused this financial crisis. When wall street and bankers got together to securitize mortgages, they created a new market where people can speculate and gamble.

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This blogexplores the potential for the transformation of economics and finance through the inspiration of physics and the other natural sciences. If traditional economics has emphasized self-regulation and market equilibrium, the new perspective emphasizes the myriad positive feed backs that often drive markets away from equilibrium and cause tumultuous crashes and other crises. Read more about the idea.

Who am I?

Physicist and science writer. I was formerly an editor with the international science journal Nature and also the magazine New Scientist. I am the author of three earlier books, and have written extensively for publications including Nature, Science, the New York Times, Wired and the Harvard Business Review. I currently write monthly columns for Nature Physics and for Bloomberg Views.